Microsoft Isn’t the Disaster Everyone Thinks

by Ed Elfenbein | January 27, 2013 9:00 am

Microsoft Isn’t the Disaster Everyone Thinks

After the closing bell on Thursday[1], Microsoft (NASDAQ:MSFT) reported fiscal Q2 earnings of 76 cents per share, which was a penny ahead of expectations. I think these results were decent despite widespread claims that Windows 8 has been a bust[2].

For the quarter, Microsoft’s profits dropped by 4% compared with last year. Quarterly revenue rose 3% to $21.46 billion, which was just shy of Wall Street’s forecast of $21.53 billion. The Windows division makes up about one-quarter of Microsoft’s overall business, and sales there rose by 11%. However, the company is getting slammed in its entertainment and office divisions.

To be sure, Microsoft has its share of problems. The online division is a financial black hole, and Xbox[3] revenue is falling rapidly. On the plus side, Microsoft is doing better with business customers. That’s often been a tough nut for MSFT to crack. They were able to sign up more customers to long-term contracts, which bodes well for future business.

The problems Microsoft is having are plaguing the entire PC sector, and that’s one of the reasons why the company has joined a possible deal[4] to take Dell (NASDAQ:DELL[5]) private. I think one analyst summed it up well[6] when he said, “Microsoft is evolving really into an enterprise software company.”

The bottom line is that Microsoft is a company with a lot of problems. But the share price is well beneath the fair value. The stock is currently going for less than 10 times this fiscal year’s earnings. Microsoft remains a good buy up to $30.